Commodity Channel Index CCI

Divergence should always be confirmed with price action or additional indicators. For scaling purposes, Lambert set the constant at 0.015 to ensure that approximately 70 to 80 percent of CCI values would fall between −100 and +100. The percentage of CCI values that fall between +100 and −100 will depend on the number of periods used. A shorter CCI will be more volatile with a smaller percentage of values between +100 and −100. Conversely, the more periods used to calculate the CCI, the higher the percentage of values between +100 and −100.

Martin Pring’s Technical Analysis Explained presents the basics of momentum indicators by covering divergences, crossovers, and other signals. As described in this article, the CCI indicator is a powerful tool that traders can use as part of their technical approach. As with most other oscillators, the CCI indicator can also be used to spot divergence. In this context, you can compare the price highs or lows to the CCI index values. Like the CCI, it ranges between zero and 100, with moves above 70 being the overbought and those below 30 being oversold.

Traders often wait for a reversal or supporting evidence before buying. Rather than trading every signal, focus on signals that align with the broader trend. These signals are best used with trend confirmation or support/resistance analysis. During a Bearish Trend, price crossing below the oversold threshold may indicate strong confidence in the move and price will continue to fall. During a Bullish Trend, price crossing above the overbought threshold may indicate strong confidence in the move and price will continue to rise.

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Read on, and you will learn the history of the CCI Commodity Channel Index, major calculation formulas, and basic trading strategies using the CCI to make profits. If you are interested in learning more about the CCI indicator or other technical indicators, please visit our website at Like any indicator, its value comes from how you use it, not just the raw signal. Add it to your chart, test its behavior in your chosen market, and see how it can refine your edge. This setup is useful for predicting reversals before they happen, especially near key support or resistance levels.

Getting Trading Signals from the CCI

• When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with.
• Similarly, an oversold level is when an asset has moved sharply lower.
• For intraday trading, the same rules and strategies that I described above work.
• Trend indicators work well with the commodity channel index CCI, such as the simple Moving Average, as well as entry point indicators, such as Price Action.

If the CCI breaks above +100, it indicates an uptrend, suggesting the asset may be overbought. If the CCI heads below -100, it indicates a downward trend, signaling a possible oversold asset. Every time the indicator breaks above +100, the uptrend momentum begins, and vice versa. In addition, the simple moving average indicator is used as another confluence trading tool to confirm the signal. Identifying overbought and oversold levels can be tricky with the Commodity Channel Index (CCI), or any other momentum oscillator for that matter. Second, securities can continue moving higher after an indicator becomes overbought.

How to Trade Stocks with the CCI

• Signal number 2 doesn’t work, the price doesn’t go in the needed direction, and the trade is exited with a loss.
• A bullish divergence occurs when the underlying security makes a lower low and CCI forms a higher low, which shows less downside momentum.
• As the CCI indicator is very popular, it is often available on nearly every trading platform.
• Technical analysis focuses on market action — specifically, volume and price.

For those unfamiliar with the term, divergence in trading is a situation of miscorrelation between the price of an asset and the indicator. Much like MACD divergence and RSI divergence, traders exploit this occurrence when they notice the CCI indicator and the price of the asset move in opposite directions. The definition of overbought or oversold varies for the Commodity Channel Index (CCI). ±100 may work in a trading range, but more extreme levels are needed for other situations. ±200 is a much harder level to reach and more representative of a true extreme. Selection of overbought/oversold levels also depends on the volatility of the underlying security.

New Trend Emerging

Most of the time, the price is midway between these critical levels. But sometimes it goes beyond its limits, thereby suggesting that the price may have reached overbought or oversold level. The best timeframe for trading with the commodity channel index CCI indicator is D1, but you can trade in a shorter timeframe as well. To do this, you need to add some trend indicators to the trading system in order to reduce the number of false signals. Cci indicator When you have an idea of the primary trend, trading with the CCI indicator won’t be difficult.

Volume Weighted Average Price (VWAP)

CCI is a very well-known and widely-used indicator that has gained level of popularity in no small part of its versatility. Besides overbought/oversold levels, CCI is often used to find reversals as well as divergences. Originally, the indicator was designed to be used for identifying trends in commodities, however it is now used in a wide range of financial instruments. Just like most oscillators, the CCI indicator is developed to define the overbought and oversold levels. The Commodity Channel Index (CCI) is a momentum-based technical indicator that helps traders identify overbought and oversold conditions, trend direction, and possible reversals.

This will allow us to understand when a new trend begins, and when the old one ends. The algorithm is calculated on the basis of classical market laws. Always a period of high prices is followed by a period of low prices, and so on.

Conversely, a longer CCI (40 periods) will have a higher percentage of values between +100 and -100. This signals that the momentum is fading and therefore we can expect price to fall. But, when momentum slows (as shown by the CCI value above +100 or below -100), you can expect price to revert to the mean. Of course, when momentum wears off, you can expect price to pull back; either make a correction or reverse trend completely or even move sideways. For example, if you are a day trader, you can try to use a shorter CCI like 10 or 8.

The formula includes the Typical Price(t) or p(t); the High; the Low, and the closing price (Close (t)) for the considered period (t). When you want to trade in a correction, it is advised to expect when the index goes beyond the level of +100 or -100, and then begins to return back to the neutral zone. The neutral zone is the area from +100 to -100, which means that the trend has exhausted and there should start a correction. You see that the CCI indicator is displayed in a separate window under the price chart of a trading instrument. The article presents an ultimate guide to trading with the CCI indicator.

A take profit is set at a distance of three times longer than the stop loss. You can also set a take profit at a strong resistance (for a purchase) or support (for a sale) level. Another option to exit a trade is when the CCI indicator reaches level +100 or -100, depending on the trade direction (buy or sell). The price chart makes a new high, higher than the previous one, while the CCI makes a lower high.

Step-by-Step CCI Calculation Example

The best way to succeed is to use a CCI-50 on a daily chart for higher reliability. To test whether combining the Commodity Channel Index with other indicators is profitable, I suggest using TrendSpider, my recommended stock research and AI-powered trading software. Over 20 years, the Commodity Channel Index (CCI) yielded double the profits compared to a buy-and-hold strategy. Based on my tests, it is one of the best indicators available today. However, optimal settings and understanding how to trade CCI are crucial for success. The primary issue revolving around the CCI indicator is how to use it.

CCI demonstrates both the classical oscillator signals and other signals that were laid down by its creator. The signal to buy in the commodity channel index CCI is the crossing of the zero line from the bottom up. Also, a buy signal may be the CCI signal line reaching the level of -200 and the formation of a bullish divergence between the price chart and the indicator chart. Trend indicators work well with the commodity channel index CCI, such as the simple Moving Average, as well as entry point indicators, such as Price Action.